Buffett boosts Goldman Sachs with $5-billion investment

Berkshire also will get warrants to buy up to $5 billion of Goldman common shares.

The deal, announced after markets closed, amounts to a huge vote of confidence by Buffett in the investment banking titan, at a time when investors remain spooked about the future of Wall Street.

"Goldman Sachs is an exceptional institution," Buffett said in a statement. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

Goldman CEO Lloyd Blankfein said the firm considered Buffett’s capital infusion "a strong validation of our client franchise and future prospects." Goldman also said it would raise another $2.5 billion by selling more common stock to the public.

Buffett will earn a hefty 10% dividend yield on his preferred shares. The warrants, which are immediately exercisable, have a strike price of $115 a share.

The deal has given Goldman’s shares a pop in after-hours trading, to $135.87. The stock had gained $4.27 to $125.05 in regular trading, after falling as low as $113.

After the harrowing turmoil in the financial system last week, the Federal Reserve late Sunday announced that it had granted bank holding company status to Goldman and Morgan Stanley -- a move that essentially ended the era of the giant standalone investment bank.

The change means the companies intend to seek more stability for their businesses by relying more heavily on consumer and business bank deposits to fund themselves, instead of the capital markets. Dependence on the capital markets is what sank rival investment banks Bear Stearns Cos. and Lehman Bros. this year as the credit crisis deepened. And in what was viewed as a desperation move, Merrill Lynch & Co. just a week ago agreed to a rushed merger with Bank of America Corp.

For Goldman and Morgan, the price for bank-like stability will be tighter federal regulation -- and far less profit potential than they had enjoyed as independent investment banks, including the ability to lever their investment bets by using extremely high levels of borrowed money.

Buffett obviously thinks that’s just fine. And with a strike price of $115 a share on his common warrants, he can buy into Goldman for less than half the stock's peak price of $248 a share about a year ago.

Until now, the 78-year-old billionaire has steered clear of making significant new investments in financial companies even as the sector has plunged this year. But the choice of Goldman is classic Buffett: He tends to favor the premier businesses in any field. He has long owned major stakes in companies including Coca-Cola Co., Wells Fargo & Co. and American Express Co.

There will be a sense of deja vu on Wall Street with Buffett's Goldman deal: In 1987 he paid $700 million for a 12% stake in what was then Wall Street’s largest investment bank -- Salomon Inc., a firm as respected (and feared) in its day as Goldman is now.

But that investment wound up putting Buffett through the wringer, after the government in 1991 accused Salomon of trying to corner government securities markets. The charges threatened to destroy the firm.

Buffett stepped in as chairman of Salomon to save its reputation and get it back on track. The firm was later acquired by Travelers Group, the predecessor of CitigroupInc.